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3/24/2022 By Jonathan Terrell

In the original blog post published on March 24, 2022, FGH's financial position was stated in millions. In fact, the correct unit is billions. The mistake was corrected on April 6, 2022. KCIC apologizes for the error.

Many corporate policyholders of AIG insurance companies recently received a notice that, understandably, caused significant tremors of anxiety. The notice indicated that AIG has engaged Fortitude P&C Solutions, Inc., to serve as its claims administrator.

In recent decades, there has been only bad news for corporate policyholders with legacy liabilities. They have seen a succession of insolvencies in the London and domestic insurance markets. More shamefully, there have been the regulator-approved restructurings and their effect of removing legacy liabilities from healthy, profitable ongoing insurance operations. The OneBeacon insolvency—the result of a blatantly crooked restructuring that was warmly embraced by the Pennsylvania Insurance Commissioner—has left the whole insurance industry waiting for the next horror. Is AIG next?

The quick answer is "no". It is a complicated transaction that I attempt to explain below. In short, while the separation of claims handling and payment responsibility from ongoing operations is an invitation to aggressive and even bad faith claims handling, I do not think there is any heightened risk of policyholders dealing with an insolvent counterpart. On the contrary, the security behind AIG's legacy insurance liabilities remains excellent.

Background - AIG has engaged in a multi-year strategy to deal with what it describes as its "Legacy Portfolio".  This began in 2011 when AIG consummated a retroactive reinsurance arrangement with National Indemnity Company (NICO) by which it reinsured the bulk of its legacy asbestos liabilities and also transferred claims administration.

After this transaction, AIG continued to manage the runoff of multiple legacy lines of liability, some of which were associated with its life business lines.  

In 2017 AIG announced a second major retroactive reinsurance transaction with NICO. Under the new transaction, NICO assumed 80% of losses of up to $25 billion excess a retention of $25 billion. The agreement covers substantially all of AIG's commercial long-tail net losses incurred prior to 2016.

Fortitude Reinsurance Company - On January 1, 2017, AIG incorporated a reinsurance company in Bermuda, now named Fortitude Reinsurance Company Ltd. In February 2018, AIG and Fortitude executed a series of transactions designed to consolidate the bulk of AIG's legacy insurance runoff lines into a single entity. Some of these transactions dealt with AIG's Life business, and it seems that Fortitude is positioning itself in particular for running off Life portfolios. As far as AIG's property and casualty insurance companies were concerned, they entered into a Loss Portfolio Transfer reinsurance agreement, essentially a retroactive reinsurance transaction, for 100% of their net insurance liabilities effective January 1, 2017, for these blocks of business: excess workers compensation; environmental exposures; exposure to other products that are no longer actively marketed; and the remaining reserves in Eaglestone Reinsurance Company.[1]

In January 2022, Fortitude Re announced the acquisition of Fortitude P&C Solutions Inc. from AIG. The press release refers to 50 professionals based in Jersey City who currently oversee 5,000 complex casualty claims on policies issued by AIG and reinsured by Fortitude Re. This sounds very much like the established AIG claims department that has been handling non-asbestos long-tail P&C claims for years.

Concurrent with these transactions, between 2018 and 2019, AIG sold ownership positions in Fortitude's parent. The most significant of these investors is the Carlyle Group. Since November 2019, AIG's ownership has been reduced to 3.5%. Fortitude is, therefore, currently unaffiliated with AIG.

Credit Analysis - The transactions summarized above are not novations that transfer the obligations of the AIG insurance companies to another entity. AIG remains prima facie liable for its obligations under the insurance policies it underwrote. What AIG did was transact for other entities to assume financial responsibility to pay claims and assume administrative responsibility to handle claims. To the policyholder, this distinction is a very fine one, as practically and operationally they are dealing with a completely separate entity for the foreseeable future. But from a credit perspective, whatever the credit risks associated with Fortitude Re and NICO, the policyholder will always have ultimate recourse to the security of AIG.

AM Best confirmed AIG’s financial strength rating as “A” (Excellent) in October 2021. A brief review of their 2021 10K reveals excellent profitability (net income of $9.4 billion), as evidenced in its general insurance combined ratio of 96, and $65.9 billion of equity after $3.7 billion of capital returned to shareholders through dividends and stock repurchases. In short, AIG’s financial resources are impressive.

Fortitude Re received its first credit rating from AM Best in August 2021, when it was assigned a financial strength rating of “A” (Excellent), following the sale by AIG of a majority of its interests in the insurer in 2020. Noting that it is already one of the largest run-off insurers in the Bermuda market, AM Best based the rating on quality management, an established operating platform, a very strong balance sheet, and access to the financial flexibility of the Carlyle Group. Following various reorganizations, Fortitude Re (a Bermuda company) is owned by Fortitude Group Holdings, LLC (Delaware) which is owned by FGH Parent, L.P. (Bermuda). Carlyle owns 71.5 percent of FGH. A review of FGH financial statements shows invested assets of $46.8 billion, equity of $4.9 billion, revenues of $2.9 billion, and net income of $1.7 billion. These are impressive results, although the insurer is hardly in the same class as AIG in terms of financial resources. I am referencing the parent financials, not Fortitude Re’s standalone ones, as these are what are available on the website. 

NICO, the Berkshire Hathaway reinsurance subsidiary through which AIG transacts the great majority of its retroactive reinsurance deals, also has mighty financial resources. AM Best affirmed its financial strength rating of A++ (Superior) in January 2022, citing the insurer’s extensive financial resources and expertise and the ability of the management team to manage the underwriting cycle successfully. At December 31, 2021, NICO disclosed invested assets of $374 billion and a policyholder surplus of $239 billion. Net income for the year was $10 billion.  Of particular note is the enormous increase in surplus of $50 billion from the change in unrealized gains in its extensive investment portfolio.

In other words, the three insurance companies in the chain of financial security for AIG policyholders are all strong and give no present cause for alarm in terms of their ability to pay claims.

Claims Handling - The combination of financial responsibility for claims payment now being with an entity no longer affiliated with AIG, plus claims administration being transferred as well, creates an unhealthy opportunity and incentive to act in bad faith. While arrangements with third-party administrators are common in the industry, this sort of arrangement with little supervision and likely pursuant to a long-term contract is a very different beast. As discussed above, the combination of the transfer of claims administration and financial responsibility is practically and economically a novation, though legally it is not.

The strong incentive to retain the renewals of existing policyholders and the importance of claims handling reputation in attracting new business are powerful incentives for an underwriting insurer to handle claims with good faith. That went away after the series of transactions described above.

It is still early. Perhaps the powers that be at Fortitude Re and Fortitude P&C Solutions will embrace a different claims handling philosophy than is typical of run-offs. But the more likely eventuality that policyholders must brace for is the “slow pay, no pay” practices that have shamed the industry while enriching shareholders and insurance company management at the expense of policyholders.

[1] Eaglestone was the entity that was the counterparty to the 2011 retroactive reinsurance transaction by which AIG reinsured its asbestos liabilities at National Indemnity. Eaglestone, in turn, reinsured asbestos liabilities from all other AIG entities with those exposures.

Jonathan Terrell

About Jonathan Terrell

Jonathan Terrell is the Founder and President of KCIC. He has more than 30 years of international financial services experience with a multi-disciplinary background in accounting, finance and insurance. Prior to founding KCIC in 2002, he worked at Zurich Financial Services, JP Morgan, and PriceWaterhouseCoopers.

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